Fuel, base effect : WPI inflation hits series high, CPI at 6-month peak

This will add to the woes of policy-makers and complicate the task of the central bank at a time when risks to economic growth remain elevated even though the second Covid wave seems to be waning.

Elevated global commodity prices, highly taxed auto fuels and unfavourable base effect propelled wholesale price inflation in May to 12.94%, the highest in the current series with 2011-12 base year, showed the official data released on Monday. Retail inflation, too, spiked to a six-month high of 6.30% in May, as food inflation returned, aided by a 30.84% rise in oils and fats, and price pressure in fuel & light surged (11.58%).

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Fuel and power inflation in the wholesale price index (WPI) jumped to as high as 37.61% in May, albeit aided by an inconducive base, while at the retail level, fuel and light inflation surged to 11.58%.

Importantly, core WPI inflation hit a series-high of 10% in May, having recorded a broad-based rise. ICRA has projected it to climb to a fresh series-high of 10.4-10.9% in June, and sustain in double-digits until September. Core retail inflation, too, hit an 83-month high of 6.55% in May, according to India Ratings.

This will add to the woes of policy-makers and complicate the task of the central bank at a time when risks to economic growth remain elevated even though the second Covid wave seems to be waning.

Already, in the monetary policy statement earlier this month, the central bank suggested that excise duties, cess and taxes imposed by the Centre and states “need to be adjusted in a coordinated manner to contain input cost pressures emanating from petrol and diesel prices”.

It cautioned that the rising trajectory of international commodity prices, especially of crude, together with logistics costs, pose upside risks to the inflation outlook. It has projected CPI inflation at 5.1% in FY22—5.2% in Q1; 5.4% in Q2; 4.7% in Q3; and 5.3% in Q4— with risks broadly balanced.

Elevated WPI inflation (if it remains sticky) may spill over to the retail level, although given the battered demand condition, some analysts feel this transmission may not be substantial, if not muted.

ICRA chief economist Aditi Nayar said: “The continued rise in global crude oil prices, a weaker rupee and the upward revision in domestic fuel prices remain risk factors for the upcoming WPI print. However, we expect the headline WPI inflation to recede modestly to 11.9-12.3% in June, as the base starts to normalise.”

What also adds to policy-makers’ worries is the return of retail food inflation. It widened to 5.01% in May from 1.96% in the previous month. Inflation in oil and fats surged by 30.84%, eggs by 15.16%, non-alcoholic beverages by 15.10% and fruit 11.98%. Inflation in transport and communication jumped by 12.38%, while that in health remained elevated at 8.44%.

India Ratings principal economist Sunil Sinha said retail inflation has already gone past the RBI’s target level (upper band of 6%). “…we believe a rising wholesale inflation, which is gradually finding a reflection in the retail inflation as well, is going to make things difficult for the RBI,” he said. However, given the growth inflation dynamics, RBI is unlikely to alter either the policy rate or its accommodative stance, he added.